S.F. firm launches water company competition

A San Francisco-based consulting firm is launching a first-of-its-kind competition to showcase the “Top 50 Water Companies” globally, in hopes of spurring more investment in the sector.

“The purpose of the competition is to show there is a critical mass of companies that constitutes a true industry,” said Laura Shenkar, principal of the Artemis Project, which is running the contest. “This is advanced water technology, and it is a venture capital investment opportunity.”

Water has become a hot topic among investors as more regions deal with water scarcity, and climate change threatens to reduce the snowcaps on which many municipal water sources rely.

Water technologies range from pumps to desalination plants that purify seawater for drinking to membranes that offer improved filtration.

And many investors say “blue tech” will be the next big sector, like Web 2.0 or networking in the recent past.

Less than 2 percent of the $8.4 billion in venture capital invested in U.S. cleantech companies last year went to water ventures, according to the Cleantech Group.

San Rafael-based PAX Water Technologies was one of the lucky ones. The company designs efficient mixing equipment for large water tanks and reservoirs. Menlo Park-based Khosla Ventures invested in the company in January 2008.

“The idea of venturing into a mature industry like municipal water and looking at bringing efficiency through better flow dynamics is unusual,” said Peter Fiske, chief technology officer at Pax Water. “On the one hand, investors like finding something that is different that isn’t an also-ran or me-too technology. But on the flip side, it makes the business plan and growth model a lot more challenging for them to evaluate because they don’t have benchmarks to evaluate against.”

Shenkar said she sees lots of water-focused companies get one round of venture capital and then fail to raise additional rounds.

The problem, she said, is venture capitalists aren’t convinced the sector has enough activity and that the U.S. water market can’t grow fast enough to meet venture capitalists’ investment timelines.

But she said the best opportunities are in early-stage companies selling technology to the commercial market, not to municipal water companies.

“A municipal sale doesn’t make any sense for small technology companies,” she said.

The problem with water, investors say, is it’s free or practically free, which makes it difficult to sell new products and technologies that ultimately raise the cost of water to consumers.

Investors are interested in looking at opportunities in water because there will always be demand for water. And, shares in public water companies seem to gain value in a recession, said Anup Jacob, a partner at San Francisco-based Virgin Green Fund.

Jacob describes the water industry as highly regulated and highly fragmented. Throw in a long time for companies to get products to market — an average of five to 20 years, he said — and it’s been “a very tough place to invest historically.”

The investment opportunities the Virgin Green Fund likes are in water metering, which would enable tracking and monitoring of water use, and desalination. Virgin, funded by Sir Richard Branson, also has made an investment in Seven Seas, a producer of small-scale desalination services. Virgin Green Fund would like to commit 25 percent of its fund to water investments provided it can find enough companies that make sense for Virgin. He said he’s looked at likely every deal searching for venture money in the water sector but isn’t sure that there are 50 good deals out there, as the Artemis Project contest implies.

“Are there 50 new companies creating some really huge change?” he asked. “That’s a tougher bet.”